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CS Professional · Banking and Insurance - Laws and Practice · Analysis of Financial Statements of Banks

A bank had accrued and credited to income Rs 3,00,000 as interest on a corporate loan during the year. At year end the loan was classified as NPA, and Rs 1,20,000 of that interest had been accrued in the books but not actually collected. What is the correct treatment for this Rs 1,20,000 under RBI income recognition norms?

The bank must reverse the Rs 1,20,000 from income and recognise further interest only when actually received. RBI norms require that uncollected interest already credited to income be reversed when the account turns NPA, so income is not overstated.

  1. ARetain it as income since it was earned in the year
  2. BReverse it from income and do not recognise further interest until realisedCorrect
  3. CTransfer it to the general provisions account
  4. DReverse only the amount accrued in the current quarter

Explanation

When an account becomes NPA, interest accrued and credited to income but not collected must be reversed or provided for. Further interest on the NPA is recognised only when actually received. Keeping it as income overstates profit; the quarter-only reversal is not the rule.

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